More oil output cuts

As we had expected, at the weekend a group of eleven non-OPEC states agreed to reduce their joint crude oil production by 558 kbd. The non-OPEC group thus meets a corresponding “condition sine qua non” demand from the OPEC states. OPEC had made the implementation of its own decision to cut production (30.11.) by a nominal 1.2 mbd conditional on the non-OPEC states also agreeing to contribute an additional volume of between 500 and 880 kbd to the cutback.

Russia will be responsible for the bulk of the non-OPEC cut and will reduce its production level by 300 kbd in the course of H1 2017. Russia’s energy minister Alexander Novak said that this is a “genuine cut” that will reduce the production volume from 11.25 mbd to 10.95 mbd by April/May. Further contributions to the reduction come from Mexico (-100 kbd), Oman (-45 kbd), Azerbaijan (-35 kbd), Malaysia (-20 kbd) and Kazakhstan (-20 kbd).

The OPEC cartel paved the way for this non-OPEC agreement last Wednesday when it said it was prepared to accept a good deal of “creative bookkeeping” in order to clear the last stumbling block out of the way of this OPEC/non-OPEC cooperation – which can be marketed as a prestige success. The cartel also recognises natural – in other words not brought about deliberately – decreases in production of various non-OPEC states such as Mexico and Azerbaijan as official contributions to the cut in production.

On the bottom line it is fair to say that only the reduction commitments from Russia, Oman and Kazakhstan are regular cuts, whereby the “dimming down” of Russian output over time limits Russia’s average “contribution level” in H1 2017 in real terms to “only” 150-200 kbd.

Saudi-Arabia’s oil minister, Khalid Al-Falih, who welcomed the non-OPEC group’s reduction resolution ostentatiously, also signalled at the weekend that the desert kingdom not only intends to implement the production cut from 10.54 to 10.06 mbd agreed within the framework of OPEC immediately on 1 January 2017, but will possibly even extend its “production diet” beyond the negotiated level.

The market paid tribute to the non-OPEC group’s decision to cut production – on a par with the final starting shot for the implementation of the OPEC deals from the previous week – and to the prospect of a Saudi production volume below the psychologically-important “10-mbd mark” (which now looks possible) by pushing the Brent crude oil price up 4% to USD 57 (WTI: USD 54.)

Summary: The non-OPEC group’s decision to cut production by around 0.6 mbd (in the course of H1 2017) at the weekend corresponds qualitatively and quantitatively almost exactly to what we formulated as the base scenario a week ago (following the OPEC deal). Only Saudi-Arabia’s announcement that it will at least fulfil its previous cutback commitment – and already as of day 1 of the agreement period – represents a moderate intensification of the efforts to throttle back production. But all theory is grey! However, more important than the well-intentioned announcements will now be the discipline and speed shown by the participating OPEC and non-OPEC states in implementing the cuts. Nor should one lose sight of the fact that any additional (marginal) oil price dollar will bolster the enthusiasm and confidence of US shale oil producers as regards stepping up their comeback efforts.

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